dustin

Surrender Fees Considerations when Terminating Group Annuity Plan

6 posts in this topic

Hello! I've read through a lot of old content on this board and just want to say thank you. It has been a huge help. Lord knows this industry in a minefield of misinformation and salesmen. 

I am the new administrator of a 20 year old group deferred annuity plan with MetLife for a mid-sized non profit. We are looking to terminate this plan and start a new 401k (or 403b) with much lower fees. We have calculated that each participant is paying an average of 2% in AUM fees annually (1.25% annuity fee + .75% ave fund fees). This plan also comes with a 7% surrender fee that decreases by 1% each year. 

We have been advised by a TPA to leave the plan open and start a new 403b with a different provider. However the provider that I'd like to work with (Guideline Technologies) does not yet offer a 403b. This would also drag out the closure of the MetLife account. Unless people are really pushed out of the plan, I imagine a lot of people will drag their feet. I'd like to avoid having to manage 2 separate providers for any longer than necessary. 

So I'm thinking it would be better to immediately terminate the 403b and incur all surrender fees (which I've calculated to come out to around 65k). I've run a cost analysis (attached) that shows that if we move to a low cost provider such as Guideline which has only .15% AUM fees, then our participants would be better off moving their assets immediately and incurring all surrender fees rather than wait a few years for the surrender fees to subside. 

So my question is... do you see any downside to this plan? Since the surrender fees would be paid by the individuals, could the organization be held liable for any damages? Or do you have a better solution for us? 

Thanks so much in advance. I'd be happy to answer any questions for clarification as well. 

Asset Loss v Surrender Fee Cost Analysis.xlsx

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Without looking at your spreadsheet, you are probably right.  You can either pay the surrender charge all at once, or the high contract fees over time, and they are probably about the same, or the SC is less.  Nevertheless, it's a tough sell.  Sounds like a good-sized plan; if you're talking about hundreds of dollars per participant then they shouldn't squawk too much.  If you're talking about thousands for some participants - (deep breath) - it may be the right thing to do but you are really going to get some resistance.  The only way to deal with it is probably to explain the harsh facts - some agent got an outrageous commission for selling this and the insurance company recaptures that commission from the participants over time.  The only way out is to cut your losses and run.

As far as Guideline - I haven't heard of them, but I work in different corner of the field probably.  I did see something that said they were a start up in 2015 and that worries me a bit.  Don't want to have to go through this again or have them bought out and go to some other platform.  If you've shopped it carefully and feel like that's the best option then fine, but if you haven't shopped it I would recommend that before pulling the trigger.

Good luck!

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Have you considered negotiating a contract modification?  The company I work for (also in the group annuity plan business) would rather change (older) contracts than lose a client.

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@Bird Thanks for your feedback. I think we have come to the same conclusion. There are a few higher ups who will balk at the fees they will have to pay, but they will probably find it hard to argue with the math if I present it correctly. 

As for Guideline, I've shopped around quite a bit. We received Proposals from over 10 companies including Vanguard, Fidelity, a few insurance companies, and a few other Silicon Valley start ups. I've done some thorough research into Guideline including looking into their founding team and contacting their current clients and they seem to be top notch from every angle. If you are curious about cost comparisons from my research I've laid it out here: https://docs.google.com/spreadsheets/d/1kC3t72lt5h_JChpr_hFeCi6mri_9uLINFRDMLlw8JfQ/edit#gid=0 These numbers are based on 2M and 4M AUM. 

Their youngness bothers me as well, but I figure under a 401k plan structure it shouldn't be too hard to wrap it up and move it to another vendor if things don't work out there. 

@MoJo We have tried renegotiating with MetLife, but they came back with an offer still significantly higher than any non-insurance companies. We are no longer interested in bundling insurance with retirement investing. Thanks for the suggestion though. 

Edited by dustin

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Sounds like you've thought it through pretty well.  They probably won't/can't renegotiate it because they are, effectively, still paying off upfront commissions and if they lower the fees it comes out of their pocket.  Once they get past that recovery period they will usually cut out the costs associated with commission recovery (but won't unless you ask them!).  My experience is that insurance companies exist in this business solely, or primarily, to pay upfront commissions.  I guess in the very large plan market they are competitive but I'd have to see the numbers on a specific plan to believe it.  IMO they are bloated and inefficient.

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